Cisco Gets Into the TV Picture

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Scientific-Atlanta Inc., the second-largest supplier of set-top boxes in the cable industry, is selling itself to Cisco Systems Inc. for $6.9 billion in cash. With the acquisition, Cisco is signaling its intent to become a one-stop outlet for television, telephone and data networking equipment that use Internet communications.

Adding S-A’s set-top box and transmission technologies will give Cisco the ability to supply broadband-network operators with devices it expects will simplify the back-and-forth transmission of video, voice and data services using Internet protocols.

“This will reduce the complexity of merging video, voice and data over IP networks,” Cisco CEO John Chambers said.

“Customers want integrated solutions,” said S-A chairman and CEO Jim McDonald, who will stay on for two years after the deal closes.

S-A WAS ON THE RISE

Cisco will pay S-A, founded in 1951, $43 in cash for each of its shares. That’s about a 4% premium over the 54-year-old company’s share price of $41.45 on Thursday, the night before the deal was announced.

S-A hit a 52-week high ($42.25) in afternoon trading Nov. 18, after the deal was announced. Cisco dipped to $16.99, down 38 cents.

The acquisition of S-A and its 6,500 employees is expected to close in April.

Cisco’s move into television devices comes after several years in which the company has moved aggressively to supply telephone companies with gear. S-A on Friday also talked up new prospects with telephone companies, such as SBC Communications Inc.

S-A already supplies video gear to SBC, but McDonald said the box maker lost out on at least one big phone-company deal — he wouldn’t say which — because it was not able to offer a wider range of products.

“If you look at the capital budgets of a couple of guys [in the telephone business], they’re almost as large as the whole cable industry by themselves,” McDonald said. “It’s a huge opportunity to supply these guys.”

Oppenheimer & Co. equipment analyst Lawrence Harris said S-A has been eager to win seconda source contracts with Verizon Communications Inc., which buys equipment from rival Motorola Inc., and with BellSouth Corp. for video offerings. This deal, Harris said, is likely to improve S-A’s chances of attracting more of that business.

In some ways, the deal mirrors Motorola’s purchase of General Instrument Corp. five years ago. Back then, cable’s other large set-top vendor was swallowed up by a company with a broad product line that was missing the in-home video piece.

Cisco generated $1 billion in revenue from cable this year, largely from its routing and cable-modem termination system businesses. Also there: Cisco’s most recent cable-related acquisition, home-networking provider Linksys.

McDonald will report to Cisco senior vice president Mike Volpi.

CISCO KEEN ON VIDEO

“Video over a broadband infrastructure is becoming the centerpiece of the investment service providers are making,” said Volpi. “How to build video-enabled IP infrastructure is a critical asset. The S-A acquisition completes the quad-play offering for Cisco.”

He said Cisco believes “video represents the biggest opportunity going forward.”

“IPTV will take off,” Chambers said, fueling a video-equipment business expected to rise to $9.9 billion in 2009 from $3.6 billion.

S-A’s core product line consists of set-tops and related conditional-access and other gear for cable system headends. It has shipped 22 million digital set-tops, including 3.7 million digital video recorders and 2.6 million high-definition tuners.

S-A is Time Warner Cable’s primary set-top supplier, and expects its share of Comcast’s business to grow to 14% from 7% after the two top cable companies absorb Adelphia Communications Corp.’s cable assets, S-A corporate senior vice president and president of subscriber networks Michael Harney said.

Cisco is a major router and switch supplier to Comcast. The two companies also collectively count Cox Communications Inc., Cablevision Systems Corp., SBC and Verizon as major customers.

Cisco also is a major supplier of gateways and soft switches for cable voice-over-Internet protocol telephone rollouts. Cisco also has sold 7 million IP phones, as large businesses also move to voice over IP services, Volpi said. Linksys is a key supplier of home-network and routing gear for consumers.

UNIFIED IP PLATFORMS

Both companies foresee broadband service providers merging separate voice, data and video on a single Internet-protocol platform, allowing services to merge onto similar devices. “Consumers want tightly coupled applications, networks and devices,” Volpi said.

The major cable companies’ wireless initiative with Sprint Corp. — which will eventually bring cable video and high-speed data services to mobile phones — will be enabled by a common IP platform, he noted. Such a platform will let operators provide such applications as caller ID on the TV screen, programming a DVR from a cell phone and shifting music and pictures files among PCs and TVs.

“Scientific-Atlanta has a portion of the solution and Cisco knows a great deal about networking and they’ve got Linksys,” Oppenheimer’s Harris said. “That’s where I do see some sort of capabilities emerging.”

The sale of S-A is not a big surprise. The Lawrenceville, Ga., company began shopping itself in the spring, approaching French telecom equipment giant Alcatel and Cisco, Gartner Group analyst Patti Reali said in a report.

Alcatel passed, but other potential suitors emerged, including Samsung Electronics Co., Sony Corp. and Panasonic Corp.

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